Further oil price disruptions damage world economy

FURTHER oil price disruptions can cause severe damage to the fragile world economy, as sudden attacks on oil facilities become potentially more frequent.

Representing the sixth attack in four months on Saudi energy assets, the recent disruption may have caused a short spike in oil prices, but continuous strikes can have a more lasting effect on oil prices.

Many people who were caught unawares, are already wondering if this is a one-off strike.

Of all the recent strikes, the one with the most powerful impact on oil price was the latest attack using 25 drones and missiles on two of Saudi Aramco’s facilities, removing 5.7 million barrels of oil per day of crude oil.

Brent crude surged 20%, almost hitting US$72 per barrel, at the start of trading last Monday and registered a gain of 14.6% as prices fell back to US$69 per barrel.

US crude jumped 14.7%, the highest since 2008.

Repair work to restore oil production especially at Abqaiq, the world’s largest oil processing facility, is being intensively carried out while security, strengthened.

During the Gulf War in 1990, spot oil, which is bought and sold for near term delivery, jumped from US$17 per barrel in June that year, to US$24 per barrel at the end of July.

Following Iraq’s invasion of Kuwait on Aug 2, the spot price for crude rose further to US$28 per barrel on Aug 6.

By mid-october, it had surged to US$40 per barrel, before falling back for the rest of 1990.

The Gulf War in 1990 had driven up the price of oil, reduced consumer and business confidence, and exacerbated the US downturn that was already underway.

Consumer confidence, according to the University of Michigan survey, dropped by 28% between the second and fourth quarters of 1990.

The US recession in 1990 lasted eight months through March 1991, which was considered mild, but employment remained sluggish throughout the recovery through June 1992.

US real Gross National Product fell by over Us$100bil, in 1982 dollars, by 1991.

If sustained, high oil and gas prices can also place additional strain on US consumers, the bedrock of the US economy.

While they still remain confident, multiple factors which act as “assaults” on the US consumer, may be just sufficient to trigger a recession, said Pong Teng Siew, head of research, Inter-pacific Securities.

The trade war, spike in oil prices and a peak in the US employment market, all constitute “assaults” on the US consumer.

A Conference Board survey shows that the US consumer still remains confident in August; its consumer confidence index slipped to 135.1 in August from a slight upward revision of 135.8 in July.

The index fell less-than-expected from a Reuters forecast of 129.5 in August. In stark contrast, a University of Michigan survey showed that US consumer sentiment posted its largest monthly decline 2012, dropping to 89.3 in August from 98.4 in July.

While many cry foul over negative factors, some see opportunities arising from US interest rate cuts and easy liquidity measures in the United States and eurozone.

Geopolitical risks, though, is a factor to watch for.

Against speculation that oil price could hit US$100 to US$150 per barrel on a major confrontation, it is currently still deemed at “acceptable at levels ranging from US$50 to US$70 per barrel,” said Danny Wong, CEO, Areca Capital.

It may be too early to expect a recession, but slower growth is obvious, as corporates and economies look for ways to manoeuvre their business strategies.

Future proof segments in technology development include potential areas in 5G, green tech, digitalisation, renewable energy, financial technology, food technology and ecommerce.

The basic needs segment which is still core for better prospects include the food, medical, pharmaceutical, transportation and leisure sectors.

The oil and gas sector could also benefit as long as oil prices do not fall, and sustain at levels that are “significantly higher” than current levels, that is, in the event of more disruptions to supply.

Petroliam Nasional Bhd’s (Petronas) domestic upstream capex will likely be moderately higher, and that will be positive for relevant oil and gas service companies, said Vincent Khoo, head of research, UOB Kay Hian.

Petronas plans to spend Rm35bil in capex in the second half of 2019, with Rm15.7bil spent in the first half, as oil and gas activities in Malaysia pick up with an increase in rigs in production to 28, compared with 18 last year.

On upstream investments, it plans to spend Rm167.6bil over the next five years; last year, Petronas spent Rm27.3bil with 69% in overseas projects.

Columnist Yap Leng Kuen also sees the urgent need to de-escalate in heightened tensions in the Gulf area, just like in trade wars.